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Panos Mourdoukoutas
Panos Mourdoukoutas
Articles (26) 

Red Hat Cannot Fix IBM's Problem

IBM is in decline, and the Red Hat acquisition does not solve its issues

October 20, 2020 | About:

The recent Red Hat acquisition is touted to be driving the "creative destruction" at International Business Machines Corp. (NYSE:IBM), i.e. the selling off of resources from mature declining businesses in order to funnel cash into emerging fast-growing ones.

However, in my view, this isn't enough to fix IBM's problem: a prolonged decline in revenues. I have come to this conclusion after analyzing the company's third-quarter earnings results, which were published after the market closed on Monday.

The results showed that Cloud & Cognitive Software (CCS) revenues reached $5.6 billion, up 7% year-over-year. CCS comprises Cloud & Data Platforms, which includes Red Hat, Cognitive Applications and Transaction Processing Platforms.

Cloud & Data Platforms grew 20% year-over-year (up 19% adjusting for currency), again led by Red Hat.

Cognitive Applications grew 1%, led by Security and Supply Chain. Cloud revenue grew by more than 60%.

"The strong performance of our cloud business, led by Red Hat, underscores the growing client adoption of our open hybrid cloud platform," said Arvind Krishna, IBM's CEO. "Separating the managed infrastructure services business creates a market-leading standalone company and further sharpens our focus on IBM's open hybrid cloud platform and AI capabilities. This will accelerate our growth strategy and better position IBM to seize the $1 trillion hybrid-cloud opportunities."

Meanwhile, Big Blue's traditional businesses continue their decline. Revenue from Global Business Services (includes Consulting, Application Management and Global Process Services) came in at $4.0 billion in the recent quarter, down 5% compared to the same period last year, driven by declines in Application Management and Consulting.

Global Technology Services (which includes Infrastructure & Cloud Services and Technology Support Services) revenues came at $6.5 billion, down 4%.

All in all, IBM had another dismal quarter with revenues falling to $17.6 billion, down from $18.03 billion in the year-ago quarter. That's the 33rd quarter of sales decline.

Apparently, Red Hat has helped Big Blue's "creative destruction," but that wasn't enough to help the old tech company catch up with top competitors like Amaznon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) in terms of overall revenue growth. So far, it hasn't even been enough to reverse its long-term decline.

Still, Big Blue's senior management sees light at the end of the tunnel. "In the third quarter we continued to deliver strong gross profit margin expansion, generated solid free cash flow, and maintained a sound capital structure with ample liquidity," said James Kavanaugh, IBM's senior vice president and chief financial officer. "We have the necessary financial flexibility to increase our investments in hybrid cloud and AI technology innovation and skills while remaining committed to our long-standing dividend policy."

Disclosure: I don't own any shares of IBM

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About the author:

Panos Mourdoukoutas
I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.

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